Wednesday, January 25, 2006

The ASEAN economy

The most significant economic initiative in Southeast Asia is the ASEAN Free Trade Area (AFTA). Currently the main implementation arrangement is the Common Effective Preferential Tariff, where members charge uniform and low tariffs to imports from other members. According to this brief (PDF), average tariff within the ASEAN is below 4%. Most products have a tariff of 5%. (Certain sensitive products, comprising about 1% of the total number of products, are permanently excluded from CEPT and free trade). Ultimately the goal is elimination of all customs duties by 2010.

Following the establishment of the AFTA, "trade among ASEAN countries has grown from US $ 44.2 billion in 1993 to US $ 95.2 billion in 2000, representing an average annual increase of 11.6 percent. As of the year 2000, intra-regional exports made up about 23.3 percent of total ASEAN exports. Before the financial and economic crisis struck in mid-1997, intra-ASEAN exports had been increasing by 29.6 percent. This is significantly higher than the rate of increase of total ASEAN exports, which grew at 18.8 percent during the same period." Currently intra-ASEAN exports account for 22% of all ASEAN exports.

Lots more need to be done for full economic integration. Some heavily regulated products require mutual recognition of standards before being freely imported. A perfect example is pharmaceuticals. I would love to see recognition of safety and efficacy standards in the rest of Southeast Asia, where medicines tend to be much cheaper, by 40 to 70 percent, than in the Philippines. This is anti-poor, anti-rational, an outrage. Importation, even just within ASEAN, should be deregulated starting now . Expect lies, damn lies, and statistics to be dished out by the powerful pharmaceutical lobby to oppose this, the way they opposed the Generics Drug Law back in 1988.

Another problem is the movement of persons. While short-term visits are visa-free, there remain quite stringent barriers to intra-regional employment. There are working groups within ASEAN actively looking into promoting labor market integration.

Once these obstacles have been hurdled, what next? Following the EU example, ASEAN may adopt a common currency. Aside from reducing transaction costs within the region, a common currency would make monetary policy uniform, perhaps improving the investment climate; it would also force fiscal discipline on the member states. This is decades from now, but hey the EU was 40 years in the making.

The ASEAN economy is simply the way to go.

6 comments:

cvj said...

This is all well and good but it would be much better if we included South Asia i.e., India, Bangladesh and Sri Lanka in the Free Trade Zone. A lot of multinationals (especially IT Companies) structure their regional organizations along these lines so this has the added advantage of making it easier for these companies to do business.

In the area of labor market integration, the movement of IT skills between India and the Philippines is one area that could definitely be improved. With the IT talents of both countries, we have the potential of creating a mega-IT corridor, a virtual Silicon Valley.

Econblogger said...

CVJ,

Actually APEC is supposed to be a free trade area someday, though there has been nothing concrete, unlike AFTA (which has the CEPT). It may well be that we iron out the kinks within ASEAN first, then invite more participants under an ASEAN plus formula (now we are talking about ASEAN+3, i.e. China, Japan, South Korea, and ASEAN + 3 + South Asia.)

Amadeo said...

BTW, where is Taiwan in all of this?

Taiwan, which already has a virtual and real Silicon Valley clone within its territory.

Econblogger said...

Any kind of official relationship with Taiwan is impossible, under the one-China policy. I think Taiwan and Hong Kong should be introduced through the backdoor - by incorporating China, we apply the same policies to HK SAR and Taiwan, both "special" regions or provinces of the People's Republic. Then that will work.

Amadeo said...

Roel,

Given what you said about how to bring in Taiwan and Hongkong, am not sure which side will feel slighted.

China who has always claimed Taiwan as part of the mainland.

Or Taiwan who has always claimed itself as free and independent from the mainland.

And it has been the US "wedge" that has kept the twain from being merged.

Doesn't the Philippines have a Taiwanese Embassy/Consulate? I know that many Taiwanese invest/conduct businesses within the country.

Econblogger said...

International diplomacy is a fuzzy thing to me. (And maybe to diplomats too). As far as I know there is a Taiwan "office" but we don't call it consulate or embassy for fear of irking PROC. Taiwan has never formally declared independence, though PROC formally claims Taiwan as a province. So all these arrangements with HK and Taiwan will require China's consent. As usual, it is hoped that economic imperative will trump vocabulary - we can call Taiwan an "observer", say but then otherwise negotiate as if another state.

The US is mainly interested in keeping the status quo. Taiwan (and I suspect the Taiwanese people) will not accept the same status as province as say Guangdong. It may be that some compromise formula, such as Special Administrative Region under "one country, two systems", may be acceptable to both sides.